Should Amazon (AMZN) Be in Your Portfolio?

Believe it or not, Amazon.com, Inc. (AMZN) is still a growth company. It's one of the most innovative companies in existence, which has led to its unhindered growth throughout the years. The problem with Amazon has been the bottom line. CEO Jeff Bezos has the attitude that the company should go out of its way to make customers happy, even if this results in a hit to the bottom line. The theory is that this will lead to increased business and stellar customer retention and that down the road Amazon can grow revenue enough (and cut some costs) in order to deliver consistent profits. It’s basically a long-term step-by-step approach. In two of the last three fiscal years (FY), and two of the last four quarters, Amazon has reported losses. But the top line continues to impress.

We’ll take a look at the annual numbers soon, but what most investors are missing about Amazon isn't on their radar. There is one very important external factor that should help determine Amazon’s near and long-term fate. (For more, see: How We'll All Be Amazon.com Customers Eventually.)

Key Metrics

First take a look at Amazon’s revenue and net income performance over the past three fiscal years (all numbers in thousands as of 4/9/15):

Amazon

FY2012

FY2013

FY2014

Revenue

$61,093,000

$74,452,000

$88,988,000

Net Income

$(39,000)

$274,000

$(241,000)

That’s incredible top-line growth for a company that has been around since 1994. The bottom line is a different story, and it’s the primary reason investors aren’t sure what to make of Amazon. Some investors are content as long as the top-line growth remains. Others are becoming impatient with the lack of profits. The stock has appreciated 22.29% over the past year, so the bulls have been correct. As a side note, there is no dividend yield on Amazon, which is expected since it’s a growth stock.

Amazon has a debt-to-equity ratio of 1.50, which is neither impressive nor worrisome. It has $17.42 billion in cash and $16.09 billion in long-term debt. That’s a healthy balance sheet, especially when the company has generated $6.84 billion in operational cash flow over the past 12 months. With Amazon’s stock trading at 169 times earnings, any surprise negative news can lead to a gap-down, but stocks like these also offer the most upside potential. A lot should depend on your risk appetite. (For more, see: Breaking Down the Balance Sheet.)

It should also be noted that Amazon held up much better than most tech stocks during the financial crisis. In August of 2008, it traded at a high of $80.81. In March of 2009, it traded at a low of $73.44. However, this doesn’t mean it will hold up as well if a similar market crash occurred. Market crash or not, this isn’t likely to be the best time to invest in Amazon, but it should be a surefire long-term winner. The following will explain why. (For more, see: Is Amazon Prime Still the Best Deal in Tech?)

King Dollar

This quote is from Amazon’s 10-K: “If the U.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be lower than if currencies had remained constant.”

Amazon needs net sales growth in order to be successful and for the stock to remain appealing to investors. The U.S. dollar trades against other major currencies, which include the euro and the Japanese yen. The European Central Bank (ECB) and Bank of Japan (BOJ) are printing money at unfathomable rates in order to fight deflation. The U.S. Federal Reserve is done printing money, which makes betting against the U.S. dollar a backward-looking trade. For now (not for the long haul), the U.S. dollar should continue to appreciate against other currencies. The U.S. government also has $17 trillion in debt and the private market has $45 trillion in debt. These debts must be repaid, which will lead to massive deleveraging. By reducing the supply of dollars, the demand for those dollars should increase, which will also help strengthen the U.S. dollar. (For more, see: Get to Know the Major Central Banks.)

This will all negatively impact Amazon. However, Amazon must aim for geographic expansion for the long haul. And, eventually, recent Federal Reserve policies will likely lead to rampant inflation when there’s organic economic growth (5-10 years from now). At that time, the U.S. dollar will decline and commodities should rebound. For Amazon, it will be a net positive.

The Bottom Line

Amazon is without a doubt a top-tier company. The problem is the U.S. dollar, which might negatively impact the company in the near future. That said, thanks to superb innovation and diversification, Amazon has very high odds of being a significant long-term winner. Based on these circumstances, consider staying on the sidelines for a better entry point so you can maximize your profits. (For more, see: What's at Stake As Google Takes on Amazon?)